Universal Credit: What are ‘taper rate’ changes in Budget and who will benefit?

Chancellor claims he has given low-income families ‘tax cut’

Universal Credit claimants will be able to keep more of the benefit as they earn more in a major change announced by the chancellor Rishi Sunak aiming at making sure the government “rewards work”.

The government had been heavily criticised for axing the £20-a-week Universal Credit uplift brought in during the pandemic – removing £6bn from the pockets of people on low incomes.

But the chancellor used his latest Budget to reveal that the “taper rate” – the amount of Universal Credit taken away for every £1 earned through work – will be changed so less is removed from those in work.

So what is the change to the ‘taper rate’?

Universal Credit starts to be phased out when you start earning again. If you are getting back into work but are still on Universal Credit, you could be in with a significant windfall because of the taper rate change.

For every £1 you earn, your Universal Credit was cut by 63p. This taper rate will now be reduced to 55p – leaving you with an extra 8p per pound to spend.

The move, promised no later than December 1, should in theory ease the burden on claimants who are in work and provide them with more of an incentive to increase their hours.

Mr Sunak said the previous, higher taper rate amounted to a “hidden tax on work”, claiming his changes were effectively a “tax cut” for low-income families.

The chancellor also said the amount that people with limited capability for work can earn before their Universal Credit payments are reduced – known as the work allowance – will be increased by £500 a year.

How many people will benefit?

Around two million of the 5.8 million households in receipt of Universal Credit are in work, so could benefit from the changes.

Mr Sunak claimed the change to the taper rate and work allowance would mean an extra £1,000 a year, on average, for just under two million households.

How much is the government spending on the changes?

Mr Sunak said the taper rate changes amounted to a “£2bn tax cut” for low-income households. But others have estimated it could cost more.

Karl Handscomb, senior economist at the Resolution Foundation, said every 1p reduction in the taper rate would cost the government between £300 and 400m. So an 8p drop could cost the government between £2.4bn and £3.2bn.

The changes do not do anything to help people who are not in work. And it does not compensate for the end of the £20-a-week uplift which came into force earlier this month.

Labour’s shadow chancellor Rachel Reeves said: “After taking £6bn out of the pockets of some of the poorest people in this country, he is expecting them to cheer today at being given £2bn to compensate.”

Morgan Wild, head of policy at Citizens Advice, welcomed the change to the taper. But she said it “doesn’t cushion the blow of the £20-a-week cut for those still looking for work or the 1.7 million unable to work because of disability, health issues or caring responsibilities”.